ORDER
K.C. Singhal, Judicial Member
1. Both these appeals were heard together and are being disposed off by the common order for the sake of convenience.
2. The main issue arising from these appeals, relates to the disallowance of Rs. 17,51,91,740 on account of payment under Voluntary Retirement Scheme (VRS) and ex gratia payment pertaining to assessment year 1996-97 and Rs. 56,55,979 in respect of assessment year 1997-98, which have been deleted by the Learned CIT (Appeals).
3. Briefly stated the facts as narrated in the assessment order are these. Assessee company had a unit for manufacture of Pharmaceuticals at Kurla. This unit was undergoing labour problems. Assessee company accordingly decided to close down this unit. Therefore, first VRS was brought out in August, 1995 in which 37 employees opted for the scheme. Total payment was of Rs. 1.39 crores. This was only a part of the assessee’s proposal to close down the Kurla Unit. Since all the employees of Kurla Division did not opt for VRS, assessee devised the scheme of transferring the Kurla Factory as going concern to Suvidha Chemicals. Accordingly, an agreement was entered with them and the factory along with employees and all assets were transferred to Suvidha Chemicals vide agreement dated 15-12-1994. As per this agreement, assessee company agreed to transfer the Kurla unit to Suvidha Chemicals as a going concern along with its all assets and liabilities as well as the employees. As a result of transfer of employees, assessee company agreed to transfer all contributions to approved PF & other funds to Suvidha Chemicals. Suvidha Chemicals agreed to take over the employees along with undertaking to pay retrenchment compensation. A consideration of Rs. 6,87,50,000 was agreed between the assessee company and Suvidha Chemicals for the said transfer. Subsequently, assessee made another agreement dated 26-9-1995 with Suvidha Chemicals. As per this agreement, at the time of original agreement, there were 250 employees in the Kurla Manufacturing Unit. But 39 employees were transferred or reduced. Therefore, assessee company agreed that the consideration payable to Suvidha Chemicals shall be proportionately reduced. Accordingly, the net consideration payable was revised to Rs. 6,48,50,000. It was mentioned in this agreement that sale transaction has been completed at 4.30 p.m. on 26-9-1995 and the manufacturing unit at Kurla has been handed over to Suvidha Chemicals. However, this arrangement of transfer of manufacturing unit along with employees did not meet the approval of union of employees. They agitated and filed various writs in Mumbai High Court and in Industrial Tribunal. Ultimately, the consent decree was filed on 23-1-1996. Suvidha Chemicals, assessee company and the union all agreed to come to settlement. Memorandum of settlement dated 23-1-1996 had been drawn. This was approved by Hon’ble Mumbai High Court. Earlier, arrangement of sale to Suvidha Chemicals was also cancelled by the Industrial Tribunal. Accordingly, the transfer to Suvidha Chemicals of Kurla Manufacturing Unit as going concern became null and void. With the memorandum of settlement dated 23-1-1996 drawn between employees of assessee, assessee and the Suvidha Chemicals, earlier arrangement of sale of Suvidha Chemicals stood cancelled and a new VRS was drawn.
4. In the memorandum of settlement between the assessee company and the union of employees, following had been agreed.
(a) The assessee will offer a VRS to which the union has agreed.
(b) All the employees have agreed to retire under the VRS.
(c) The resignation letter of all the employees have been obtained and given to the assessee company.
(d) VRS shall be with effect from 1-4-1996.
(e) The concerned employees shall not raise dispute after acceptance of VRS.
5. Accordingly, the VRS was revised for being applicable to company’s Kurla Manufacturing Unit and Central Warehouse situated at Kurla. All the employees of assessee in these two units at Kurla opted for the VRS. After the retirement of employees, Kurla manufacturing unit was closed. Plant and machinery at Kurla worth Rs. 59,75,838 was sold and balance plant and machinery of Rs. 48,28,229 was shifted to assessee’s plant at Ankleshwar or at third party manufacturing locations. The land was surrendered to the landlord on 21-3-1996.
6. The Assessing Officer also noted that the first scheme of VRS was approved by CCIT, Bombay and was in operation during the period September, 1995. The payment was under this scheme was Rs. 1,39,13,591, which was duly paid in the year itself. However, no provision was made in the books of account in respect of the claim of Rs. 12,36,85,638 under the second VRS and for Rs. 3,75,92,511 in respect of ex gratia payment.
7. The Assessing Officer was of the view that the payments under VRS as well as on account of ex gratia was not allowable as deduction since it related to closure of factory unit at Kurla. The following observations were made by him for rejecting the claim of the assessee:
To be a permissible allowance, the expenditure must be for the purpose of carrying on the business and where the business is closed and as a result of the closure of the business, the liability to pay retrenchment compensation has arisen, the liability to pay the retrenchment compensation cannot be said to be a liability which arose at the time when the business was being run and, therefore, the amounts paid or agreed to be paid towards retrenchment compensation cannot be termed as expenditure wholly or exclusively for the purpose of the business for the liability to pay the retrenchment compensation arose after the closure of the business and not while running the business.
In support of the above observations, the Assessing Officer relied on the following judgments :
(i) Nathalal Asharam v. CIT
(ii) CIT v. Gemini Cashew Sales Corpn.
(iii) M. Seshadri Iyengar & Sons v. CIT
(iv) Venkatesa Colour Works v. CIT
(v) Mysore Standard Bank Ltd. v. CIT
(vi) Binani Printers (P.) Ltd. v. CIT
(VII) Modi Electric Supply Co. v. CIT
(viii) Intesco Raw Silk Co. v. CIT
(ix) P.N. Ganeshan (P.) Ltd. v. CIT
(x) CIT v. Central Art Press and
(xi) India Mfrs. (Madras) (P.) Ltd. v. CIT
Apart from the above, the Assessing Officer was also of the view that liability under second VRS was a contingent liability since the scheme was effective from 1-4-1996. Further, there was no enforceable liability till 31-3-1996 and, therefore, the question of allowing in deduction for the year 1996-97 did not arise. For the similar reasons, he made disallowance for the assessment year 1997-98.
8. The matter was carried in appeal for both the years before the Learned CIT (Appeals), before whom, it was contended that the appellant was engaged in an indivisible business of manufacture and sale of bulk drugs and formulations at two units located at Kurla (Mumbai) and Ankleshwar (Gujarat). Considering that the ennployees at Kurla factory as surplus and with a view to bringing about rationalization and economy in its operation, the appellant brought out a VRS to its employees. It was submitted that the appellant was carrying on a common business within these two units under the control of a single management and having a common fund from which the working capital needs of both the units were met. It was stated that the ultimate gain or loss was worked out by a single Profit & Loss Account and hence, it was clear that the appellant had a single business activity and there was complete inter-connection, inter-lacing and interdependence of activities between its two units. Therefore, it was argued that closure of one unit did not in any way tantamount to closure of business. Reliance in this connection was placed on the decisions in CIT v. P.I. Simon , Bansidhan (P.) Ltd. v. CIT , Sassoon J. David & Co. (P.) Ltd v. CIT , CIT v. George Oakes Ltd. , CIT v. Machinery Mfrs. Corporation Ltd. , Pradeep Pictures v. CIT and CIT v. Assam Oil Co. Ltd. . It was also contended that the various judgments relied upon by the Assessing Officer were not applicable to the appellant since these judgments related to those assessees who had closed down their business altogether either by winding up their company or dissolving their partnership firms, and not merely closing down one of the units. It was further submitted that by laying off certain employees the appellant was not deriving any benefit of enduring nature and moreover the Assessing Officer had himself stated that the laying off excess human capital, the appellant had restructured its business which was in contradiction to his conclusion of saying that there was closure of business. It was stated that in fact there was restructuring of the business by the appellant in order to bring about rationalization, economy and commercial expediency and therefore, the VRS expenditure was a deductible expenditure and not capital in nature.
9. Proceeding further, it was submitted that the liability accrued upon execution of the Memorandum of Settlement (MOS) on 23-1-1996, it was contended that the MOS was a tripartite agreement, inter alia recorded mutual consent of all the three parties on the following issues :
(i) The Union had accepted on behalf of the employees the VRS.
(ii) The employees in the General Body Meeting accepted and agreed to the VRS.
(iii) The employees had signed the voluntary retirement application forms which were tendered to the Querist.
(iv) The employees were not entitled to withdraw their applications once submitted.
(v) The company had accepted the voluntary retirement applications; and
(vi) The voluntary retirement of the employees was to be effective from the evening of April, 1996.
10. It was contended that the said agreement was filed before the Mumbai High Court and consent decree and order was passed by the Mumbai High Court on 23-1-1996 making the agreement legally binding on all the parties and the same was irrevocable and the breach thereof would amount to contempt of Court. Thus, it was submitted that although the effective date of retirement of employees mentioned in the MOS was 2nd April, 1996, a complete and unalterable contract was arrived at between the appellant and employees’ union upon signing the MOS and hence, the liability for payment of the VRS amount was a contractual liability arising in the financial year 1995-96 itself. Therefore, it was submitted that a complete and perfect liability had arisen on 23-1-1996, which was a legally enforceable liability and not a contingent liability as held by the Assessing Officer.
11. Thus, it was argued that the VRS amount payable was a contractual liability and not a contingent liability and, therefore, the same was allowable in the year under appeal. The appellant placed reliance on the decisions in CIT v. Swadeshi Cotton & Flour Mills (P.) Ltd., Macneill & Magor Ltd. v. CIT , Addl CIT v. Buckau Wolf New India Engg. Works Ltd. , Calcutta Co. Ltd. v. CIT and CIT v. Rajkumar Mills Ltd. . Further, the appellant placed reliance on the Supreme Court decision in the case of Kedarnath Jute Mfg. Co. Ltd v. CIT , wherein, it was held that the factum of making or not making an entry in the books of account was not decisive as far as the issue of accrual of liability was concerned. In another Supreme Court decision in the case of K.J. Francis v. CIT , it was held that in case of promulgation of ordinance, liability arose in the year in which ordinance was passed irrespective of the date of payment or method of accounting followed by the assessee.
12. With regard to the ex gratia payment, it was submitted that the same was also to be made in pursuance of the consent terms, to the employees as a matter of commercial expediency and for the employees carrying out certain obligations and for having cooperated with the appellant by not divulging any information acquired during the course of employment. It was contended that the employees and their union had indeed carried out their obligations in the financial year 1995-96 relevant to the assessment year 1996-97 and the co-operation that was referred to was also an event of 1995-96 and hence, ex gratia was allowable as an expenditure in the year under appeal. It was argued that the contention of the Assessing Officer that it was in the nature of bonus was not correct as ex gratia payment was only the nomenclature used in the MOS and it was neither a payment under the Payment of Bonus Act nor did it signify any statutory payment covered by Section 43B of the Act and, therefore, no addition could be made under that section.
13. The Learned CIT (Appeals) accepted the contentions raised on behalf of the assessee and deleted the addition of Rs. 17,51,91,740 for Assessment Year 1996-97 by observing as under:
13.1 Coming to the question of allowability of the liability under VRS and ex gratia payment, I am of the opinion that the appellant deserves to succeed because the liability did crystallise during the year consequent to the execution of agreement dated 23-1-1996 between the appellant and the employees’ union even though it was to take effect from 1-4-1996. Even the Bombay High Court passed the Consent Decree on the same day whereby the agreement was irrevocable and binding on both the parties. Further the liability was not quantified and annexed to the agreement dated 23-10-1996 and only the payments were made later on. However, the fact remained that the agreement was completed during the year itself and hence, the liability did accrue during the year and the same was quantified also. The appellant did not make provision for the same as it was to take effect from 1-4-1996 and the payment was to be made in two/three instalments. At any rate the Supreme Court has laid down in the case of Kedarnath Jute Co. that the entries in the assessee’s books of account are not relevant and that the allowability of a claim is determined by the provisions of the I.T. Act, 1961. Therefore, considering the facts and circumstances of the case in its totality, I am of the opinion that the assessing officer was not justified in disallowing the claim of Rs. 17,51,91,740 of the appellant. Accordingly, he is directed to allow the same.
14. For the similar reasons, the appeal for the assessment year 1997-98 was allowed. Aggrieved by the same, the Revenue is in appeal before the Tribunal for both the years.
15. The Learned Departmental Representative for the Revenue has vehemently assailed the order of the Learned CIT (Appeals) by making various submissions. It was contended by him that payment was in the nature of retrenchment as it related to the closure of Kurla unit and, therefore, not allowable as deduction in view of the Hon’ble Supreme Court judgment in the case of CIT v. Gemini Cashew Sales Corpn. . According to him, the nomenclature given by assessee as VRS was not relevant. What was relevant was the intent and purpose of the scheme. Accordingly, he also referred to the schemes appearing in the paper book. Proceeding further, it was also submitted that both the units were different and independent units manufacturing different drugs and, therefore, any payment made to employees on the closure of one unit cannot be allowed as deduction under Section 37 of the Act in view of the Hon’ble Madras High Court judgment in the case of India Mfrs. (Madras) (P.) Ltd. v. CIT . Hon’ble Calcutta High Court judgment in the case of Binani Printers (P.) Ltd. v. CIT : 13 Taxman 215. He referred to both the decisions and submitted that their Lordships confirmed the disallowance after considering the Hon’ble Supreme Court judgment in the case of Gemini Cashew Sales Corpn, (supra). It was also pointed out that in both the above cases, assessee was carrying on more than one activity and payment was made on closure of one of the units carried on by assessee. Accordingly, it was pleaded that these judgments were directly applicable to the present case. Lastly, it was contended that VRS was effective from 1-4-1996 which date fell within the financial year 1996-97 relevant to assessment year 1997-98 and, therefore, liability, if any, accrued in assessment year 1997-98 and, therefore, no claim could be allowed in Assessment Year 1996-97.
16. On the other hand, the Learned Counsel for the assessee has supported the order of the Learned CIT (Appeals) by submitting that case is covered by later judgment of the Apex Court in the case of K. Ravindranathan Nair v. CIT [2001] 247 ITR 178 : 114 Taxman 53, where on similar facts, the claim was allowed. It was submitted that payment was on account of voluntary retirement and not by way of retrenchment compensation on termination of service. Since the scheme is approved by the High Court, no other meaning can be attributed to the scheme. He also distinguished the judgment of Supreme Court in the case of Gemini Cashew Sales Corpn. (supra) by submitting that the said judgment is applicable where payment is made on the closure of entire business which is not the case of assessee. On the contrary, the entire products continued to be manufactured at Ankleshwar unit. Proceeding further, it was submitted that in case of any conflict between two judgments, it is the later judgment which is binding in view of decision of Hon’ble Delhi High Court in the case of Bhika Ram v. Union of India [l999] 238 ITR 113. Proceeding further, it was submitted that purpose of scheme was to reduce the operational cost and, therefore, expenditure was allowable under Section 37 of the Act. It was further submitted that no contingency was involved as every obligation of assessee crystallized on 23-1-1996 when MoU was signed. There was no option either for management or for workers. None could withdraw from the MoU as it was in accordance with High Court order. Hence, the claim was allowable in assessment year 1996-97. However, in the course of arguments, the Learned Counsel for the assessee agreed that concept of same business was relevant and deduction could be allowed only when both the units constituted the same business. Accordingly, he drew our attention to Para-13, Page-9 of the order of the Learned CIT (Appeals) for assessment year 1996-97 where a finding has been given that there was complete inter-lacing, inter-connection, inter-dependence, unity of control, etc., in respect of both the units. Hence, it was argued that the claim was allowable under Section 37 of the Act.
17. Rival submissions have been considered carefully in the light of case law referred to and the material produced before us. The first question to be considered is whether payment made under VRS by assessee can be said to be expenditure incurred wholly and exclusively for the purpose of business carried on by it. Heavy reliance has been placed by the Revenue on the judgment of the Apex Court in the case of Gemini Cashew Sales Corpn. (supra), while assessee has placed reliance on the later judgment of Hon’ble Supreme Court in the case of K. Ravindranathan Nair (supra). A close and conjoint reading of both the decisions reveals that there is no conflict between these two decisions,
18. In the case of Gemini Cashew Sales Corpn. (supra) assessee was a partnership firm consisting of two parties which was dissolved on the death of one of the partners on 24-8-1957. Subsequently, the business of partnership firm was taken over by the remaining partners. The assessee claimed deduction of Rs. 1,41,506 representing the retrenchment compensation payable by the firm to its workers even though services of its employees were not interrupted as their services continued after such dissolution without altering the terms of employment. The question arose whether such payment was eligible for deduction under Section 37 of the Act. Their Lordships of the Hon’ble Supreme Court held that deduction was not allowable as obligation to pay compensation arose for the first time after the closure of business. At this stage, it would be appropriate to refer to the relevant observations which are being reproduced as under :
As already observed, the liability to pay retrenchment compensation arose for the first time after the closure of the business and not before. It arose not in the carrying on of the business, but on account of the transfer of the business. During the entire period that the business was continuing, there was no liability to pay retrenchment compensation. The liability which arose on transfer of the business was not of a revenue nature. Profits of a business involve comparison between the state of the business at two specific dates. Normally, the liability which occurs after the last date, unless its source is in a preexisting definite obligation, cannot be regarded as a part of the outgoing of the business debitable in the profit and loss account. A deduction which is proper and necessary for ascertaining the balance of profits and gains of the business is undoubtedly properly allowable, but where a liability to make a payment arises not in the course of the business, not for the purpose of carrying on the business, but springs from the transfer of the business, it is not, in our judgment, a properly debitable item in its profit and loss account as a revenue outgoing. The claim of the firm to treat it as an item in the determination of the profits of the firm under Section 10(1) of the IT Act cannot, therefore, be sustained.
Under Section 10(2)(xv) of the Indian IT Act in the computation of taxable profits (omitting parts of the clause not material) “any expenditure laid out or expended wholly and exclusively for the purpose of such business, profession or vocation” i.e,, business, profession or vocation carried on by the assessee, is a permissible allowance. But to be a permissible allowance the expenditure must be for the purpose of carrying on the business. Where accounts are maintained on the mercantile system, if liability to make the payment has arisen during the time of business is carried on, it may appropriately be regarded as expenditure. But where the liability is, during the whole of the period that the business is carried on, wholly contingent and does not arise any definite obligation during the time that the business is carried on, it cannot fall within the expression ‘expenditure laid out or expended wholly and exclusively’ for the purpose of the business.
19. In the case of K. Ravindranathan Nair (supra), the assessee had closed 4 units out of 10 units run by it due to labour problems. On 21-11-1970, the assessee entered into a settlement with the trade unions and agreed to pay them for the period of services up to the date of lock out. Accordingly, payment of Rs. 4,18,107 made which was claimed as deduction under Section 37 of the Act. The said claim was disallowed by Assessing Officer but the Tribunal allowed the claim of assessee after recording a finding that all the ten units constituted the same business. High Court did not agree with the view of the Tribunal which resulted in further appeal to the Supreme Court. The Apex Court reversed the judgment of the High Court and affirmed the view of the Tribunal by observing as under :
Held, reversing the decision of the High Court, that there was no challenge by the Revenue to the facts found by the Tribunal before the High Court. The Tribunal extensively analysed the documents placed before it and came to the conclusion that the ten units run by the assessee constituted a single business. It was because a part of the business had been affected by labour disputes, that for the industrial health of the business as a whole, it was thought just and necessary that the industrial disputes in that one part of the business be stopped. This was the purpose for which the payment was made and it was, therefore, incurred for the purposes of the business. The Tribunal noted correctly that it was for the assessee to decide how he would conduct his business. For the purposes of continuing his business, he had to reduce the number of units from ten to six. Any incidental expenses in reducing those units were an expenditure incurred in the course of conducting the business and allowable under Section 37. The expenditure of Rs. 4,18,107 that was incurred by the assessee was a business expenditure and the assessee was entitled to its deduction under Section 37.
[Emphasis supplied]
20. A close reading of both the decisions reveals that both the decisions are applicable to different set of facts and there is no conflict between these two decisions. In the former case, it is clear that expenditure on account of compensation was not allowable as it was incurred after the closure of the entire business and, therefore, it could not be said that expenditure was incurred for the purpose of business. However, it has been made clear that if the liability to make payment has arisen during the time the business is carried, it may be allowed as deduction under Section 37 of the Act. In the later judgment, the entire business of assessee was not discontinued as six units continued to be run by assessee. The Tribunal also came to the conclusion that all the 10 units constituted the same business. So the Supreme Court, considering the fact that all units constituted the same business, held that expenditure was allowable as deduction as obligation to pay the same arose in the course of business and for the purpose of business. So, the legal position emerging from these two decisions is that – (i) if obligation to pay any amount arises on the closure of entire business, then deduction is not permissible, (ii) if the obligation arises in the course of business carried on by him, the deduction would be allowable if the units closed by assessee and the remaining activities constitute the same business. Therefore, if it is found on facts that closed units was separate business, then obligation arising on the closure of such units would not be allowable as deduction.
21. The decision of Madras High Court in the case of India Mfrs. (Madras) (P.) Ltd. (supra) relied on by the Learned Departmental Representative is also in consonance with the above legal position. In that case, the High Court observed that assessee failed to establish that the activity of servicing of typewriters (closed by assessee) was integral part of the business of trading in typewriters. In view of such factual finding, it was held as under :
Where there are two separate and independent businesses carried on by the same assessee, if the assessee chose to close one business and carried on the other business, the retrenchment compensation paid as a result of the closure of one business cannot be claimed as an allowable deduction as against income from the other business which is being carried on by the assessee. Such a claim for deduction can be upheld only if it is shown by the assessee that both the businesses are inter-connected and inter-dependent and not independent.
[Emphasis supplied]
So, it is clear that deduction is not allowable if closed business is separate from the other business continued to be carried on by the assessee. Impliedly it means that the claim would be allowable if closed business and continued business constituted the same business,
22. The decision of the Calcutta High Court relied on by the Revenue certainly helps the Revenue inasmuch as in that case expenditure by way of compensation to employees on closure of one of the units was held to be disallowable in view of Supreme Court judgment in the case of Gemini Cashew Sales Corpn. (supra). However, perusal of the said judgment shows that no plea was raised as to whether two activities constituted the same business. Hence, this aspect of the matter remained to be considered. This decision is, therefore, in conflict with the later decision of the Hon’ble Supreme Court and, therefore, cannot be followed.
23. The decision of the Gujarat High Court in the case of Bansidhar (P.) Ltd. v. CIT , is also in consonance with the later decision of Supreme Court inasmuch as it was held that retrenchment compensation paid on the closure of one of the business was allowable as deduction if it is shown that there was complete inter-connection, inter-lacing, inter-dependence and unity of control between closed business and business continued to be carried by the assessee.
24. Coming to other decisions relied upon by the Assessing Officer, we find that the same are distinguishable on facts as in all these cases the entire business was closed and these were governed by the former decision of Supreme Court. The present case is governed by the later decision of the Apex Court,
25. In view of the above discussions, it is held that deduction in respect of payment to employees on the closure of one of the units or activities is allowable as deduction if it is shown/proved that closed unit/business and other business carried on by the assessee constituted the same business.
26. The next question to be considered is whether liability to pay arose or accrued in the year under consideration. In our opinion, it was a contractual obligation which arose on the date of agreement between assessee and union by virtue of the order of the High Court. This agreement was accepted by the workers and there was no option with either party to back out from the agreement. The liability to pay was thus absolute and accrued on 23-1-1996 when agreement and approved by the High Court was signed. Hence, the claim was allowable in the year under consideration despite the fact that no entries were made in the books of account in view of Supreme Court judgment in the case of Kedarnath Jute Mfg. Co. Ltd v. CIT .
27. As per legal position mentioned above, we are in agreement with the Learned Counsel for the assessee that such claim is allowable as deduction under Section 37 if it is shown that closed unit at Kurla and other unit at Ankleshwar constituted the same business. Whether two units constituted the same business would depend on the facts of each case. Such finding of fact can be arrived at only after considering the relevant materials or evidences on record. In the present case, the Assessing Officer had no occasion to consider this aspect of the issue since be rejected the claim of assessee on the basis of Supreme Court judgment in the case of Gemini Cashew Sales Corpn. (supra). The Learned CIT (Appeals) has given a finding at Page-9 of his order for assessment year 1996-97 that two units constituted same business as there was inter-connection, inter-lacing, inter-dependence and unity of control in respect of both the units. But no evidence has been referred to by him in coming to this conclusion. The Learned Counsel for the assessee has also not been able to demonstrate that any evidence was furnished by assessee to establish that two units constituted the same business. Therefore, it is held that factual finding given by the Learned CIT (Appeals) in this regard was without any basis and has to be vacated.
28. In view of the above discussions, the orders of the Learned CIT (Appeals) for both the years are modified on this issue and the matter is restored to the file of Assessing Officer for fresh adjudication after ascertaining the fact whether Kurla unit and Ankleshwar unit formed part of the same business after giving reasonable opportunity of being heard to assessee who shall be allowed to furnish all evidences in support of its claim. If the Assessing Officer finds that both the units formed part of the same business, he shall allow the claim of assessee.
29. Before parting with this issue, we may mention that apart from VRS, the payments include payments on account of ex gratia and leave encashment. However, the Learned CIT (Appeals) has not given any finding in this regard. The copy of the agreement regarding ex gratia payment is also not on the record. Since we are restoring the entire matter to the Assessing Officer, the Assessing Officer shall readjudicate the issue regarding ex gratia payment and leave encashment in accordance with law. It may also be mentioned that assessee has claimed the deduction in assessment year 1996-97 on the basis of mercantile method of accounting while the deduction in assessment year 1997-98 has been claimed on payment basis. Assessee cannot blow hot and cold simultaneously. The Assessing Officer is directed to allow the claim only on the basis of accrual.
30. The next issue, common to both the appeals, relates to the deletion of the disallowance made by the Assessing Officer on account of unutilized MODVAT credit. Both the parties are agreed that this issue is now covered in favour of the assessee by the judgment of the Hon’ble Supreme Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. wherein, it has been held that unutilized MOD VAT credit cannot be considered as income liable to income-tax. Respectfully following the same, this issue is decided in favour of the assessee. The orders of the Learned CIT (Appeals) are, therefore, upheld.
31. The next common issue relates to the disallowance of Rs. 1,45,000 on account of entertainment expenses under Section 37(2A) of the Income-tax Act, 1961 (Act). The assessee had declared conferences expenses of Rs. 15,54,855 for Assessment Year 1996-97 and claimed the same as revenue expenditure. Similarly, the expenses for assessment year 1997-98 were of Rs. 12,92,000. The scrutiny of expenses revealed that the expenditure had been incurred on payment to various hotels where various conferences had been held by the assessee in connection with the promotion of sales. Such payments include not only for holding conferences but also for incurring expenses on food, beverages, etc. However, details of such expenses had not been filed by the assessee. The Assessing Officer observed that such business conferences are also attended by the persons other than employees such as dealers, stockist and C&F agents and, therefore, such expenses would amount to expenditure on hospitality within the ambit of Section 37(2), Explanation 2 of the Act. Assessing Officer also referred to the decision of the Hon’ble Himachal Pradesh High Court in the case of CIT v. Mohan Meakin Breweries Ltd. , in support of his observations. Accordingly, he estimated the sum of Rs. 3 lakhs in respect of each year on account of expenditure on food and beverages, which resulted in addition of Rs. 1,45,000 in both the years.
32. The matter was carried in appeal before the Learned CIT (Appeals), before whom, it was submitted that such business meetings/conferences were attended solely by the company’s sales and medical representatives and no customers, clients or outsiders were invited to attend these in-house meetings. The Learned CIT (Appeals) accepted this contention and deleted the disallowances made by the Assessing Officer for both the years. Aggrieved by the same, the Revenue is in appeal before the Tribunal.
33. Both the parties have been heard. The Learned CIT (Appeals) has deleted the addition by assuming that no customers, clients or outsiders were invited to attend such business conferences in as much as he has not referred to any material or evidence furnished by the assessee. In our opinion, mere submission of assessee cannot be accepted unless it is supported by relevant material or evidence on record. On the other hand, the Assessing Officer has also presumed that such business conferences must have been attended by the clients and its agents. In the absence of any material on record, it is not possible for us to adjudicate on this issue. Accordingly, we set aside the orders of the Learned CIT (Appeals) on this issue and restore the matter to the file of Assessing Officer for fresh adjudication after considering the necessary evidence on record, which the assessee would be at liberty to file before him. Accordingly, the grounds raised by the Revenue in this regard are allowed for statistical purposes.
34. The next common issue arising in these appeals relates to the disallowance under Section 43B of the Act. In assessment year 1997-98, the assessee contributed on account of Family Pension Fund to the tune of Rs. 2,18,847. The payment of these amounts was due on 15-6-1996 and 15-7-1996 but the payment was made on 13-8-1996. Since these amounts were not paid by due dates, the disallowance of Rs. 2,18,847was made for the assessment year 1997-98. The matter was carried in appeal before the Learned CIT (Appeals), before whom, it was submitted that contributions for the months of May and June, 1996, were deposited in Provident Fund Account within time instead of Family Pension Fund Account since stay was granted by the High Court to various unions for joining the new Employees Pension Scheme, 1995. It was further submitted that subsequently, the High Court lifted the stay in July, 1996 and the excess contributions were transferred to Family Pension Fund Account. Thus, there was no violation of any provisions. The Learned CIT (Appeals) accepted such contention of the assessee and deleted the disallowance made by the Assessing Officer. Aggrieved by the same, the Revenue is in appeal before the Tribunal.
35. After hearing both the parties, we do not find any reason to interfere with the order of the Learned CIT (Appeals) since the assessee had deposited the amount in the Provident Fund Account within the stipulated period. Since the High Court had granted the stay, the assessee was compelled to deposit the contribution in the Provident Fund Account instead of Family Pension Fund Account and the same was duly transferred to Family Pension Fund Account when the stay was lifted by the High Court. Thus, in our view, the payment related back to the date when it was originally made. Therefore, it is held that payment was made in time and Learned CIT (Appeals) was justified in deleting the disallowance. The order of the Learned CIT (Appeals) is, therefore, upheld.
36. Coming to assessment year 1996-97, we find that the disallowance of Rs. 5,94,208 was made by the Assessing Officer while processing the return under Section 143(1)(a) of the Act. The said addition has been deleted by the Learned CIT (Appeals) in the appellate proceedings against the intimation under Section 143(1)(a). In these premises, the Assessing Officer was not justified in computing the income by taking figures of income as processed under Section 143(1)(a). Even otherwise, the facts for this year are same as mentioned in relation to assessment year 1997-98 and, therefore, even on merits, the disallowance cannot be justified. The order of the Learned CIT (Appeals) is, therefore, upheld for this year also.
37. The next issue arising in the appeal for the assessment year 1997-98, relates to disallowance of Rs. 11,11,000 being the exchange loss in respect of the liability incurred for payment against the import of raw materials. The assessee had made provisions on account of exchange loss and claimed the same as deduction. The Assessing Officer was of the view that it was a contingent liability and could not be allowed in view of the Hon’ble Supreme Court judgments in the case of Indian Molasses Co. Ltd. v. CIT and in the case of Shree Sajjan Mills Ltd, v. CIT , the decision of the Hon’ble Allahabad High Court in the case of New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395 and the decision of the Tribunal in the case of Oil & Natural Gas Commission v. Addl CIT [1999] 69 ITD 69 (Delhi)
38. The matter was carried in appeal before the Learned CIT (Appeals), before whom, it was submitted that the loss was not on capital items, as no capital was involved but the remittances were in respect of raw materials. It was further submitted that no such disallowance had ever been made in the past. The Learned CIT (Appeals) accepted the submissions of the assessee for two reasons namely – (i) that the exchange difference was exclusively on account of import of raw materials and, therefore, the loss increased was not on capital account and (ii) such claim was being made in accordance with the regular accounting practice followed by the assessee year after year, which had been accepted by the Department. Accordingly, he deleted the addition. Aggrieved by the same, the Revenue is in appeal before the Tribunal.
39. After hearing both the parties, we find that this issue is now covered in favour of the assessee by the decision of the Special Bench in the case of Oils & Natural Gas Commission v. Dy. CIT [2003] 261 ITR (AT) 1 [2002] 83 ITD 151 (Delhi), wherein, it has been held that loss arising on account of fluctuation of foreign exchange rate was allowable as deduction when liability to pay was on revenue account. In the present case, the fluctuating loss was incurred in respect of liability towards payment of raw material and thus, the loss was on revenue account. Following the decision of the Special Bench, we do not find merit in the ground raised by the Revenue. The order of the Learned CIT (Appeals) is, therefore, upheld.
40. The next issue arising from the appeal for the assessment year 1996-97, relates to the disallowance of Rs. 4 lakhs on account of shifting of machineries from Kurla Plant to Anklesh war Plant.
41. Briefly stated the facts are, that the plant at Kurla was closed and the plant and machineries worth Rs. 48,28,229 was shifted to Ankleshwar Plant. The assessee was asked to explain as to why the expenses related to shifting of plant and machineries should not be disallowed being capital in nature. The explanation of the assessee was that, it was the case of shifting of existing plant and machineries and, therefore, neither any capital asset was acquired nor any benefit enduring in nature was obtained. However, the Assessing Officer was not satisfied with the said explanation and accordingly held such expenses to be capital in nature following the decisions of the Hon’ble Supreme Court in the case of Sitalpur Sugar Works Ltd. v. CIT and Hon’ble Madras High Court in the case of CIT v. Bimetal Bearings Ltd. . Since details of expenses incurred on shifting of plant and machineries was not filed, the Assessing Officer estimated the same at Rs. 4 lakhs and disallowed the same while computing the income.
42. On appeal, the Learned CIT (Appeals) deleted the addition by observing as under:
13. I have considered the submissions made on behalf of the appellant and the observations of the Assessing Officer. In my opinion, the view taken by the Assessing Officer that the appellant closed down its business at Kurla is misconceived because the appellant has brought on record enough material in support of its claim that the units at Kurla and Ankleshwar were part of the indivisible business carried on by it under a single management and there was complete interconnection, interlacing and interdependence of the activities carried out at these two units.
Aggrieved by the same, the Revenue is in appeal before the Tribunal.
43. Both the parties have been heard at length. On going through the order of the Learned CIT (Appeals), we find that the issue has been adjudicated in a casual manner. The Learned CIT (Appeals) has neither referred to the facts nor the reasons given by the Assessing Officer. He has also not given any reason as to why the judgments of the Supreme Court and the High Court relied upon by the Assessing Officer were not applicable. The Learned CIT (Appeals) simply allowed the plea of assessee on the ground that units at Kurla and Ankleshwar were part of the independent business carried on under the single management and there was complete interconnection, interlacing and interdependency of the activities carried out at these two units. It is not clear on what basis this finding was given by the Learned CIT (Appeals). On the contrary, the Hon’ble Supreme Court, in the judgment relied upon by the Assessing Officer, has held that shifting expenses of plant and machineries to a better place was capital expenditure in the same manner as it was for acquisition for plant and machineries. Considering the circumstances of the case, we set aside the order of the Learned CIT (Appeals) and refer the matter back to his file for fresh adjudication after ascertaining the correct facts and the case law referred to. The assessee shall also be given an opportunity of being heard.
44. In the result, appeals are partly allowed for statistical purposes.